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Have OEMs Relinquished Too Much Control Over Their Supply Chains?

A dozen years ago, some of the biggest OEMs in the electronics industry — including IBM, Hitachi, Matsushita, LG Electronics, and Nortel Networks — established E2open as a component trading site. OEMs and their subcontractors frequently found they'd ordered more parts than they needed for production.

Rather than sell those components for pennies on the dollar in the open market, E2open provided a forum for OEMs and EMS companies to trade excess inventory with one another.

A very different E2open released a cloud-based trading platform earlier this week. The E2open Business Network V 8.0 allows supply chain partners to view and manage procurement events in real-time. The product, among other things, enables users to “monetize” the various aspects of a buying transaction: it captures and compares component costs; assesses various logistics scenarios; and calculates risks such as manufacturing line downtime.

“The problem is the electronics industry has the fastest moving supply chain in the world,” said Michael Schmitt, E2open senior vice president of marketing and product management, in a phone interview.

“Additionally, the industry has become global, and the stress levels of managing the supply chain are huge. As companies have moved their inventory and process management outside their four walls, the technology available to support that move hasn't kept up. There's a lack of visibility, and if you can't see something, you can't measure it. If you can't measure it, you can't manage it.”

Research conducted by the Aberdeen Group, IDC, and the Harvard Business Review has concluded that OEMs have outsourced too much control over their supply chains. In the early days of outsourcing, OEMs contracted out manufacturing but maintained control over their supply chains. Now, EMS companies purchase and manage inventory as well as provide manufacturing services.

The problem, researchers say, is that OEMs have lost the ability to capitalize on many measures that can save costs. EMS companies usually pool their component purchases and divvy the parts up among various OEM customers. OEMs, however, may have direct relationships with suppliers that give them a price advantage. If an OEM can't see how the EMS is allocating its purchases, the OEM can't take advantage of its own discount.

Collaborative cloud platforms, among other things, allow OEMs to see such transactions in real-time. With information provided by component suppliers, EMS providers, and logistics companies, OEMs can direct their subcontractors to source to the OEM's advantage. “It's not just providing the data; it's the ability to interpret and react to the data,” says Schmitt. E2open likens the process to an air traffic control system with the OEM in the control tower.

“Some OEMs hand their bill of material over to an EMS and say 'here you go; you take care of it.' Others prefer the 'trust but verify' approach,” says Schmitt. Through cloud collaboration platforms, OEMs can decide what information they want to see and who they share it with.

E2open's system also analyzes the costs attached to changes in a purchasing transaction by running “what if” scenarios incorporating component prices, shipping costs, vendor reliability, and other factors known as key performance indicators (KPIs). The OEM sets the standard for the KPIs and shares that data with partners on a need-to-know basis.

The system works on a scaled subscription basis so that small companies can participate in the network without a lot of upfront investment in IT. This is crucial to successful collaboration, according to a December 2011 Harvard Business Review article:

    Big original-equipment manufacturers have gone too far in delegating management of lower-tier vendors to top-tier suppliers. By doing so, OEMs have weakened their control over costs, reduced their ability to stay on top of technology developments and shifts in demand, and made it more difficult to ensure that suppliers are operating in a sustainable fashion. The remedy: OEMs should selectively reestablish direct relationships with lower-tier suppliers. These include suppliers that have the most significant impact on the total cost of goods sold, are leaders in developing innovative solutions, pose the biggest sustainability risks, and can provide early information on impending shifts in the economy. A move to managing select lower-tier vendors constitutes a major change for OEMs that have been focusing predominantly on top-tier suppliers.

In other words, OEMs have to take back control. Do you agree? Let us know in the comments.

3 comments on “Have OEMs Relinquished Too Much Control Over Their Supply Chains?

  1. Nemos
    May 7, 2012

    The video is fantastic !!! . “if you can't see something, you can't measure it. If you can't measure it, you can't manage it” Yes, the idea of having software like a control tower acting in real time collecting real-time data is needed. So my answer is yes of course OEMs have to take control back.

  2. Ken Bradley
    May 7, 2012

    Barbara, Your article hits a home run with me. OEMs have handed over too much control to the EMS companies but this was not by choice; more by necessity.

    Adopting the EMS model was a necessary step for OEMs because it helped them respond to financial pressures. It took a huge portion of fixed, undifferentiated cost (the factory) and made it variable. It brought other advantages like better inventory turns, improved cash, and access to the latest manufacturing technology without R&D investment. It also provided cost reduction.

    Continuous competitive pressures on OEMS have forced them to keep overheads thin as any overworked supply chain professional can attest. The result has been that the EMS relationship has not had the detailed attention that is required. Add to this the lack of transparency in electronic component pricing, undetected data errors and demand volatility and you get the situation you describe.

    Lytica's business is essentially to untangle this and help OEMs get cost reduction. We do this with our consulting, cost reduction services and software tools like freebenchmarking.com. As a third party, we do this without increasing the fixed costs of the OEM to fill the void that has been created. Companies feel the impact of this void with higher product costs and inventory charges. Like with many illnesses, many companies are sicker than they realize.

    Given the situation, here are some recommendations that help address the issue:

    1.        Make sure you operate with your EMS provider using a price book the clearly identifies each component price and the level of inventory by component. Price books should be updated at least quarterly.

    2.        With each price book release,

    a.        Make sure that the change in inventory levels is consistent with the demand that you have been driving

    b.       Mitigate all price increases. Verify with the component manufacturer that there has been an increase in price at the level reflected in the price book. Act on the findings

    3.        Benchmark your material pricing regularly to identify out of line priced components. Negotiate with the manufacturer to get better pricing on these out of line devices and make sure these new prices are used in the price book.

    The steps to getting this under control are simple; doing it with too little resource makes it hard.

     

  3. biking.radio
    May 7, 2012

    Simply put, the issue here is lack of governance, not delegation of control over execution. Governing an outsourced supply chain management engagement is not that complicated if certain basic concepts are put in place early on. Conceptually, a provider that oversees pooled demand can manage risk far more effectively than a single-consumer can and an OEM that knows how to outsource effectively can gain more than cost variablility benefits from an outsourced supply chain operation.

     

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